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Discussion Paper Series #2003-1
Deregulation, Entry of MNCs, Public technology procurement
and Innovation capability in India's Telecommunications
Equipment Industry
Sunil Mani
April 2003
Discussion Paper Series
United Nations University, Institute for New Technologies, Keizer Karelplein 19, 6211 TC Maastricht, The Netherlands
Tel: (31) (43) 350 6300, Fax: (31) (43) 350 6399, e-mail: postmaster@intech.unu.edu, URL: http://www.intech.unu.edu
DEREGULATION, ENTRY OF MNC
S
, PUBLIC TECHNOLOGY
PROCUREMENT AND INNOVATION CAPABILITY IN INDIA'S
TELECOMMUNICATIONS EQUIPMENT INDUSTRY
*
Sunil Mani
UNU/INTECH Discussion Papers
ISSN 1564-8370
Copyright © 2002 The United Nations University, Institute for New Technologies,
UNU/INTECH
UNU/INTECH discussion papers intend to disseminate preliminary results of the
research carried out at the institute to attract comments

This paper is part of a larger UNU/INTECH research project on Development and
sustainability of R&D capabilities and their linkage to manufacturing and services in the
Telecoms Industry: cases from India, Brazil, Korea and Hungary. I am thankful to the
comments received from participants of an informal seminar at UNU/INTECH and in
particular to Lynn Mytelka and Attila Havas. Further, I received very valuable help from M.
Vijayabaskar and Mani Sridhar. The paper was also presented at an international seminar on
ICTs and Indian Development at Bangalore, India during December 9-11, 2002. My
grateful thanks to the participants and specifically to C. P. Chandrasekhar for useful
suggestions. Subsequent comments received from a referee to the paper and those received
during discussions with Lea Velho are gratefully acknowledged. The usual disclaimer holds
good: the views expressed in the paper are those of the author and do not necessarily reflect
the views of the United Nations. 4
ABSTRACT
India has a sizeable telecom equipment manufacturing industry. The industry, which was originally
dominated by just one state-owned corporation, has now been deregulated. Currently the industry consist
of twelve SMEs, which manufacture small and medium switches and seven large firms (of which five are
TNCs) manufacturing large switches). The country has a history of extreme dependence on foreign
technology imports through essentially the licensing route to manufacture large switching equipment.
These imported technologies were shown to be inappropriate to the usage pattern prevailing in the
country. Consequent to this, considerable investments were effected through in -house R&D to adapt this
inappropriate technology to local usage conditions. However some systematic efforts towards building up
of local innovation capability through 'green field R&D projects' were initiated only around the mid-
1980s. The paper defines innovation capability in telecoms equipment in terms of the ability to
conceptualise, design, and manufacture state-of-the-art tecommunications equipment coupled with the
ability to keep pace with important technological changes. This definition of innovation capability is
operationalised in terms of an index of R&D. By taking three cases of telecoms technologies namely (a)
main automatic local exchanges; (b) a Wireless in Local Loop access technology; and (c) telecom
software exports, it is demonstrated that the country has a growing innovation capability in this sector. A
survey of the various contributory factors identifies public procurement as the main instrument that has
stimulated this activity. But with the opening of the telecoms carrier industry to private sector providers,
this may become less of an effective instrument in the years to come.
Key words: Innovation capability, C-DOT, corDECT, telecom software exports, public
technology procurement.
JEL Codes:L63, O31, O32, O38 5
CONTENTS
ABSTRACT
4
CONTENTS
5
THE CONTEXT
6
SOME CONCEPTUAL ISSUES
8
I.THE EXTERNAL ENVIRONMENT OBTAINING TO THE INDIAN
TELECOMMUNICATIONS EQUIPMENT SECTOR:
11
II. MEASURING INNOVATION CAPABILITY OF THE INDIAN TELECOMS
SECTOR:
27
III. DETERMINANTS OF INNOVATION CAPABILITY IN THE EQUIPMENT
SECTOR
44
IV. CONCLUSIONS
52
REFERENCES
53
THE UNU/INTECH DISCUSSION PAPER SERIES
56 6
THE CONTEXT
India's telecommunications sector has undergone many changes especially during the last three years or
so. Although the sector has been growing at a rate of about 20 per cent a year for the last decade, it has
not been able to cope with the rising demand for new connections. The level of fixed phone density in
India is low at about 3.58 lines per hundred people, compared to the world average of 10.5. The situation
is worse in India's rural areas, where teledensity is estimated to be roughly only 0.93 lines per hundred
people. Out of 600,000 villages in India, just over half have access to telephone facilities. Furthermore,
the growth of the cellular marketcurrently about 6.4 million subscribers compared to about 200 million
in China has been much slower than expected, although in the recent period the market has been
growing at a rate of 80 per cent annually and according to some industry predictions, by 2006, India is
expected to have nearly 40 million cellular subscribers
1
. This phenomenal growth of the sector is visible
even when we take the most recent period. See Figure 1. The recent improved performance of the Indian
telecommunications sector has attracted considerable interest within the research community. Although
much of the attention in the literature has been restricted to understanding the nature and effect of the
reforms in the telecommunications services sector. A critical summary of the reform process can be found
in Jain (2001) and Mani (2000b and 2002). Further, of the eight full-length articles that were published in
the journal Telecommunications Policy (since its inception in 1977 and until now), all the eight pieces
dealt with various aspects of the reforms in the sector. On the contrary, although India is a sizeable
manufacturer of telecom equipments, the changing nature of the county's capacities in research and
production of telecommunications equipments have attracted very little attention
2
. Earlier attempts to
analyse this issue especially up to the late 1980s could be found in Brundenius and Goransson (1985) and
Mani (1992 and 1995). In the context, the purpose of the present paper is to map out the changing nature
of research and production capacities in the Indian telecommunications equipment sector especially
during the 1990s.

1
The number of mobile subscribers in India is expected to show rapid growth over the next four years.
For example,
the Cellular Operators Association of India (COAI) estimates that the number of mobile
subscribers will grow to approximately 50 million by 2005; and
Gartner (leading international business and technology intelligence firm) estimates that the
number of mobile subscribers will grow to approximately 31 million by 2005.
2
There are very few studies on the telecommunications equipment industry elsewhere in other developing
countries. However for an interesting study on the development of switching technologies in Brazil and
Korea during the period up to the early 1990s, see Mytelka (1999). A more recent analysis of the
Brazilian experience could be found in Szapiro (2000). 7
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
M
illio
n
s
o
f
lin
e
s
/
s
u
b
s
c
r
ib
e
r
s
Switching Capacity
5.82
6.78
7.97
9.80
12.03 14.63 17.74 21.26 26.05 32.77 39.91 47.40
Direct Exchange Lines including cellurar
and private basic)*
5.07
5.81
6.80
8.03
9.80
11.98 14.88 18.68 22.81 28.54 36.28
Annual additions to DELs**
0.49
0.74
0.99
1.23
1.77
2.18
2.90
3.80
4.13
5.72
7.74
Telephone Waiting List***
1.96
2.29
2.85
2.50
2.15
2.28
2.89
2.71
1.98
3.68
2.92
Number of cellular mobile phones
1.12
1.88
3.58
6.40
Number of internet subscribers
0.05
0.09
0.14
0.28
0.90
3.00
3.20
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Figure 1: Some indicators of the recent growth of the Indian telecommunications sector
Source: Department of Telecommunications (DoT) (2002a)
Since the industry (both the manufacture of telecom equipments and the distribution of telecom services)
has undergone very many major changes, the